Regulators Probe Quick Plunge in Dendreon Stock Last Year

A lightening fast selloff of shares of biotech company Dendreon last April is drawing scrutiny from U.S. securities regulators and the independent monitor assigned to keep tabs on those regulators, said people familiar with the matter.

They said an investigation by the Securities and Exchange Commission into the still unexplained trading event, during which shares of Dendreon plunged more than 69 percent in 70 seconds, is ongoing.

It is not clear if the SEC inquiry into the incident, which some academics and investors have blamed on a combination of short-sellers and high-frequency trading programs, will lead to an enforcement action, said these same sources.

SEC spokesman John Nester declined to comment.

The SEC investigation partially overlapped with an inquiry conducted last summer by SEC Inspector General H. David Kotz to determine whether securities regulators were paying enough attention to the matter.

In December, Kotz submitted a confidential report on the results of his inquiry to SEC Enforcement Director Robert Khuzami, the sources said.

The SEC is considering a Freedom of Information request from Reuters to release the inspector general's report. But a person familiar with the situation said regulators will likely deny the request on the grounds that the report discusses an ongoing probe.

The SEC cited a similar reason for rejecting an earlier FOIA request from Reuters, seeking information about any complaints filed by investors over the April 28 incident.

It is unusual for the SEC's inspector general to conduct an inquiry into the agency's handling of an ongoing investigation. Kotz's office initiated the investigation at the request of an investor and Sen. Charles Grassley, according to sources and the inspector general's semiannual report.

Grassley spokeswoman Beth Levine said his office had not received a copy of Kotz's completed report.

The Iowa Republican has had a history of taking issue with the pace of SEC investigations and asking Kotz's office to review the agency's handling of enforcement matters.

A Dendreon spokeswoman declined to comment on the investigations.

Last April, the $16 plunge in shares of the Seattle-based biotech generated a good deal of head-scratching on Wall Street. That's because in little over a minute, the equivalent of an entire day's worth of trading activity in Dendreon shares took place before Nasdaq Stock Market officials halted the stock.

Stock market officials initially suspected the rapid-fire selling was sparked by a so-called fat finger trade, or a broker putting in an erroneous order to sell too many shares. But Nasdaq officials, without issuing any comment, did not void any of the trades.

The April 28 plunge of Dendreon shares coincided with speculation in the market that the company was going to report poor test results that afternoon for its prostate cancer drug Provenge. In fact, the opposite occurred, and the company reported generally positive test results.

Once trading was allowed to resume, the stock quickly regained all of its losses. But the freak sell-off resulted in losses for retail investors who had so-called stop-loss orders with their brokers to sell shares at a predetermined price.

When a stock plunges quickly, it can trigger a stop-loss order, a sale at a previously designated price intended to limit losses. A stop-loss order can cause an investor's shares to be sold at price lower than the one he wanted.

Reuters reported in October that many investors with stop-loss orders lost money in the sell-off and some complained to regulators and asked them to look into the matter.

There have been numerous theories for the unusual trading event.

Some investors have blamed the selloff on a so-called bear raid by short-sellers looking to profit from a precipitous decline in a stock. Others attribute the ferociousness of the selling to computer-driven high-frequency trading programs that scan the markets looking to take advantage of trading trends.

James Angel, a professor at Georgetown University's McDonough School of Business, previously told Reuters that high-frequency trading programs may have exacerbated the plunge when the algorithms these trading firms use all glommed onto the same trend.